Financial Times

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Imagination Technologies named "Company of the Year" in the PLC Awards 2000.

In a year when technology stocks have caught the imagination of investors, it seems only appropriate that Imagination Technologies should take the title of company of the year.

The company changed its name and its city profile in the course of a hectic 1999. Under its former name of VideoLogic, the company had a reputation for disappointing the financial markets by missing profit forecasts.

But as Imagination Technologies, it is one of the hot stocks of the moment. It has established itself in investor's eyes as an intellectual property company, that licenses its 3D graphics silicon chip technology rather than as a video board manufacturer. And, most glamorous of all in market eyes, its technology is being used in Sega's Dreamcast machines, the video game that can be played over the Internet. Imagination gets royalties of around USD2 a chip, which are made by NEC of Japan.

True, there was a bit of a hiccough in February this year, when Sega announced that Japanese sales of Dreamcast have been disappointing. But that did not put much of a dent in the Imagination growth story. The shares, which traded between 50p and 100p for much of 1999, ended February at GBP4.40.

Hossein Yassaie, the group's managing director, said in response to the Sega warning that "we don't expect any problem with our earnings". "We are seeing a healthy quantity (of Dreamcast games) going out this year and, in fact, much bigger next year. So when our full year result comes out, people will perhaps understand the picture better."

Chips designed by Imagination help video games achieve the more realistic effects - shadows, artificial lighting - that modern aficionados demand.

And the chips are used in more than just Dreamcast - Imagination has also signed up a deal with French company STMicroelectronics to put the chips in set-top TV boxes and personal computers.

The latter deal should help the company reduce its perceived dependence on Sega, which provided around 40 per cent of Imagination's revenues last year.

Patrick Yau, an analyst at Credit Suisse First Boston, reckons that the set-top box markets should grow from 6.4m boxes sold in 1997 to 52m in 2002.

Imagination has also developed a new generation of chip, the PowerVR Series3, which it hopes will get it around 4-5 per cent of the personal computer market. In the longer term, the group hopes to provide 3D graphics, 2D digital video and audio capabilities on a single chip.

The company moved into the black for the first time in 1999, announcing pre-tax profits of GBP1.8m in the year to March 31. In November, it announced pre-tax profits of GBP1.6m for the first half of the current year. Analysts are looking for pre-tax profits of around GBP3m in the current year and about GBP8m in the year to March 2001. That puts the shares on a prospective p/e of around 90, the kind of level that technology stocks often go for these days.

The criteria for the company of the year award (sponsored by College Hill Associates) was that the winner should have demonstrated that its success is not just a short-term phenomenon. The company must be professionally managed; its long-term strategy will be intact, and its growth and development to date will have been soundly financed as befits a conservatively run growth business. The other short-listed companies were Atlantic Telecom, Fitness First and Matalan.
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